Question

A) Penny bought a new truck today from Middlefield Motors. She will receive a cash rebate of 3,500 dollars from Middlefield Motors today, pay 23,700 dollars to Middlefield Motors in 1 year(s), receive a cash rebate of 8,800 dollars from Middlefield Motors in 2 year(s), and pay 25,100 dollars to Middlefield Motors in 9 year(s). If the discount rate is 8.67 percent, then what is the present value of the cash flows associated with this transaction? Note: the correct answer is less than zero.

B) Preeti has an investment that is worth 54,300 dollars and has an expected return of 11.44 percent. The investment is expected to pay her 21,800 dollars in 7 year(s) from today and X dollars in 2 year(s) from today. What is X?

C) Blue Eagle Packaging just bought a new apple orchard. To pay for the apple orchard, the company took out a loan that requires Blue Eagle Packaging to pay the bank a special payment of 17,050 dollars in 6 month(s) and also pay the bank regular payments of 5,680 dollars each month forever. The interest rate on the loan is 1.4 percent per month and the first monthly payment of 5,680 dollars will be paid in 1 month. What was the price of the apple orchard?

Answer 1

A. Cash flows for the new truck purchase are

1. Cash Rebate of $3500 received today

2. $23700 to be paid after 1 year

3.Cash Rebate of $8800 to be received after 2 years

4.$25100 to be paid after 9 years

So,the present value of the cash flows received (cash outflows to be shown as negative cashflow)

=3500+ (-23700)/1.0867 + 8800/1.0867^2 + (-25100) / 1.0867^9

=3500 - 21809.147+7451.8369-11876.452

= - $22733.762

So, the present value of cash flows associated with this transaction is - $22733.762